Analysis: A grim prognosis

Pakistan economy is set for another year of financial instability with all its adverse economic, social consequences.

If the predictions of this year’s fiscal outcome are to be believed, the Pakistan economy is set for at least another year of financial instability with all its adverse economic and social consequences.

It is disturbing to think that this year’s weak fiscal outcome will form the ‘base’ upon which we will superimpose a new budget for 2012-13. And with no IMF around, the maestros at cooking-the-books in the Ministry of Finance will have a free hand to conjure up any ‘base’ they feel like. The year 2011-12 presented the final opportunity to stabilise the economy and get inflation trending down so as to end on a reasonably strong note. If that had happened and we had built-up some ‘fiscal buffers’, there would have been some room available for a modest relaxation in macroeconomic policies to cope with the pressures of election-year spending. But alas, this has not happened.

There is heightened concern that the next budget will include a hotchpotch of populist measures such as tax cuts, salary increases, new spending initiatives, more ill-advised and distortionary concessions and exemptions, and larger, generalised and badly-targeted subsidies for the rich. Nothing will be done to address the structural impediments that are holding back growth; nor will any concrete measures be taken to stop the staggering losses of the PSE sector and eliminate, once and for all, the scourge of circular debt.

A loose budget in 2012-13 will virtually guarantee another year of double-digit inflation. Five years of double-digit inflation would mark a new low in Pakistan’s economic history, not to mention its counterpart, lacklustre economic growth. Inflation has now become so deeply embedded that it is driving the ‘core’ (or ‘underlying’) rate of inflation. A core rate of inflation that is also in double-digits is a very troubling sign; it means that inflation has taken firm root. Will no government rid the people of this cruel tax?

Many observers feel that the economy is rushing headlong towards another economic meltdown reminiscent of 2008 and, in this context, the question of another IMF program comes up. But it is well to ask, will the IMF agree to an arrangement under the present chaotic circumstances and with elections around the corner? It seems highly unlikely unless the government (but which government?) can provide written assurances that policy measures will be taken as ‘Prior Actions’ and it does actually take them. The IMF will not give money to Pakistan, and nor should it, on another vague and bogus promise to re-submit, for example, the RGST to Parliament. We know what Parliament will do. It will kill, once again, the lynchpin of the abandoned stand-by. Pakistan has played the IMF for suckers for far too long. They need to stand firm, for Pakistan’s sake, which they have admirably done so far.

To be sure the economy has been adversely impacted and the economic situation made much more precarious by the non-availability of the foreign exchange inflows that were programmed to come in this year. Hopes for receiving even a paltry $400 million from the CSF seem to fade with each passing week.

The 3-G auction appears to have been put on hold while nothing is expected from PTCL privatization. Whether the non-materialization of these inflows reflects foolishly optimistic assumptions at the time of making this year’s budget or not, is difficult to tell. But in making such projections, experience teaches that it is always better to be prudent and have a contingent plan. The government seemed to have none so that, with no macroeconomic adjustment on the economic horizon, the only way to finance the external financing shortfalls is through a further and faster depletion of our foreign exchange reserves.

Should these external inflows eventually come in, they would no doubt help shore up the external accounts.

Published in The Express Tribune, May 15^th, 2012.